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Wednesday, April 28, 2010

ECB may have to turn to 'nuclear option' to prevent Southern European debt collapse

Greece’s fortunes were dealt yet another blow as Standard & Poor’s slashed its credit rating to junk status - BB+ - the first time that has happened to a euro member since the single currency was created, pushing yields on 10-year Greek bonds up to a record 9.73pc.

The credit-rating agency also cut Portugal’s sovereign debt ratings by two notches to A-, as the swirling storm hit the country with full-force.

“We have gone past the point of no return,” said Jacques Cailloux, chief Europe economist at the Royal Bank of Scotland.“There is a complete loss of confidence. The bond markets are in disintegration and it is getting worse every day.

“The ECB has been side-lined in the Greek crisis so far but do you allow a bond crash in your region if you are the lender-of-last resort? They may have to act as contagion spreads to larger countries such as Italy. We started to see the first glimpse of that today.”

Mr Cailloux said the ECB should resort to its “nuclear option” of intervening directly in the markets to purchase government bonds.

6 comments:

Personally, the latent Republican in me says that what Greece, Portugal, and Spain need is a reality check. Germany and France should expel them from the single currency and leave them to their own devices. This may seem cruel, but they have dug their own corporate graves, and now they need to lie in them. The Greek ministers are absolutely wrong about the market "picking on" them or "being unfair" to them. The markets are just doing what is obvious, refusing to lend to an out-of-control credit risk. (It's too bad they didn't cut them off sooner, frankly.)

A second very important benefit of Greek/Portuguese/Spanish default is that it might help nations like the U.S. which have some hope of still preserving sovereign integrity to take a long hard look at themselves and (hopefully) plan to avoid a similar fate.

The big boys have been behaving badly, too, and I pity the world when they start to fall. (I'm thinking particularly about Japan and Great Britain here.) The results could be truly horrific. However, at some point it seems that these failures will be inevitable. I wonder what this will do to the whole post-WW2 system of sovereign credit itself?

Potentially, the thing that worries me most in the U.S. is the off-balance-sheet debt burden that we are most likely carrying (e.g. with Fannie and Freddie).

Still, I think with enough political will perhaps things might be turned around. The problem is that no one has had that will even remotely since the nineties and more probably since the time of FDR. If the average U.S. debt/GDP rations are roughly accurate, this thing is savable with tax hikes (I'm sorry), spending cuts, and a couple decades of something we seem to know little about in this "Great Society:" thrift.

Statist parasites are always blaming "unfairness" or "speculators" or "short-sellers" when the ponzi jig is up. Monetary unions have always broken up when the prudent couldn't continue to subsidize the profligate.

Specifically speaking, a Greek default will help the dollar. An ECB nuclear option will help, too. The markets grade on a curve.

Look across the pond for doomsday scenarios. They ain't happenin' in the US this year.

I quite agree. It will be a while yet before this sort of thing overtakes the US, both because those who flee need somewhere to run and because our position, as I have said, is not nearly as bad as many, many others.

Financial markets move slowly, and the road to a US meltdown will have to pass through many, many foreign markets before it reaches us. Still, without fiscal self-restraint, I think we're in a great deal of danger.

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